Sec. 183 denies loss deductions beyond income earned from activities in which the taxpayer does not intend to make a profit. These deductions are typically referred to as “hobby losses.” Generally, an activity is presumed to be carried on for-profit if it makes a profit in at least three of the last five tax years, including the current year (Sec. 183(d)). If an activity is not for-profit, losses from it may not be used to offset other income. Taxpayers are generally considered to have engaged in an activity for profit based on a nine-factor test.
Taxpayers and the IRS have litigated many hobby loss cases, with the outcome not always in the IRS’s favor. In Helmick (TC Memo 2009-220), for example, a horse breeder who racked up more than $400,000 in claimed tax losses over a nine-year period could convince the court that a long-term goal to realize a profit was legitimate.